Dorothea Schäfer () (German Institute for Economic Research (DIW)) Axel Werwatz () (German Institute for Economic Research (DIW)) Volker Zimmermann () (KfW Group)
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Financial theory creates a puzzle. Some authors argue that high-risk entrepreneurs choose debt contracts instead of equity contracts since risky but high returns are of relatively more value for a loan-financed firm. On the contrary, authors who focus explicitly on start-up finance predict that entrepreneurs are the more likely to seek equity-like venture capital contracts, the more risky their projects are. Our paper makes a first step to resolve this puzzle empirically. We present microeconometric evidence on the determinants of debt and equity financing in young and innovative SMEs. We pay special attention to the role of risk for the choice of the financing method. Since risk is not directly observable we use different indicators for financial and project risk. It turns out that our data generally confirms the hypothesis that the probability that a young high-tech firm receives equity financing is an increasing function of the financial risk. With regard to the intrinsic project risk, our results are less conclusive, as some of our indicators of a risky project are found to have a negative effect on the likelihood to be financed by private equity.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2004/06.
Length: 35 pages Date of creation: 08 Jan 2003 Date of revision: Handle: RePEc:cfs:cfswop:wp200406
Note: Prepared for the "Conference on the tenth anniversary of the Taylor rule" in the Carnegie-Rochester Conference Series on Public Policy, November 22-23, 2002. We are grateful for helpful comments by Ignazio Angeloni, Chris Erceg, Chris Gust, Bennett McCallum, Lars Svensson, Carl Walsh as well as seminar participants at the Carnegie-Rochester conference, the Bank of Canada, the London School of Economics and the European Central Bank. The opinions expressed are those of the authors and do not necessarily reflect views of the European Central Bank. Volker Wieland served as a consultant in the Directorate General Research at the European Central Bank while preparing this paper. Any errors are of course the sole responsibility of the authors. Contact details of provider: Postal: Taunusanlage 6, D-60329 Frankfurt am Main Phone: ++49 (0) 69 242941-0 Fax: ++49 (0) 69 24294177 Email: Web page: http://www.ifk-cfs.de/ More information through EDIRC
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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